Yuan Edges Lower As Euro Worries Mount

Feb 25 2014, 9:03am CST | by

Yuan Edges Lower As Euro Worries Mount
Photo Credit: Forbes Business

Apparently, Wall Street prefers sunshine to storm clouds. While ignoring the run of weak U.S. data due to the bad weather, the Street is only too happy to focus on M&A activity across the developed stratosphere, choosing to believe that all is well in capital markets. This week’s sharp turn higher in investors risk appetite is helping the likes of commodity prices to once again find firmer footing. This sector is beginning to bounce back nicely from last week’s China-related concerns. Both the AUD and CAD, commodity and interest rate sensitive currencies have been helped by the fact that USD/CNY has declined with a little help from Chinese monetary authorities rather than investor positions.

Again, the major currencies remain rather stable and still show little sign that they want to break out of their contained ranges. The 18-member single currency has tried to rally following the better-than-expected German Ifo report yesterday, however, heightened speculation that Mario Draghi, President of the European Central Bank (ECB), may be considering more easing action at next week’s ECB meeting is discouraging any breakout higher by the euro. Technically, the currency continues to run into a plethora of sellers residing north of €1.3775. It’s been forced lower, not on fundamentals, but on the back of Ukraine’s current fallout situation where eager buyers prefer to flip their positions ahead of the psychological €1.37 handle.

ECB Action Hotly Anticipated

The difference in global investor moods is currently bipolar in attitude. Stateside investors remain remarkably optimistic and resilient in their opinions. The majority expects the U.S. economy to come through this weather-related malaise in stride. So much so that the ongoing emerging market issues are not weighing down any developed nation investors’ risk appetite like it has done in recent months.

It seems that the shift in investors’ individual moods and central bank expectations have resulted in most currency pairs being whipped about intraday in a very trendless fashion. The foreign exchange (forex) market appears content to trade within the confines of these ranges.

As the week progresses, everyone is beginning to become more concerned with what Draghi and the ECB will do. The fact that the Eurozone is flirting with deflation may force the ECB to act sooner rather than later. What about next week? Over the medium-term, many see downside risks to both growth and inflation in the region, unlike the ECB’s more balanced view. A lack of further policy action may undermine Draghi and his team’s credibility to tether longer-term inflation more closely to +2%. The lack of sound policy initiatives being implemented, or worse still, the ability to lose the faith of the trading public, has the potential to put the EUR in much deeper water. This market has been short the single currency for a very long time and it has more to do with the mighty dollar’s lackluster performance rather than the EUR’s flight that is undermining potential winning positions.

Chinese Central Bank Keeps Yuan Down

Looking at most of the majors’ trading patterns, there is perhaps one willing to forgo the natural trading path to true value, and that is the Chinese renminbi, or yuan. A battle rages between policymakers at the People’s Bank of China (PBoC): there are those who believe that the currency is close to its fair value and others who obviously disagree. Current, sometimes wild domestic interpretation of fundamentals (when the developed world requires stronger fundamentals China conveniently delivers) supports those who expect further currency appreciation over the medium term. The ever-present PBoC will surely create some volatility along the way. A train of thought believes that the CNY will break through that psychological CNY6.00 handle sometime this year. Investors are heavily positioned that way. But it will not happen if Chinese policymakers have their way.

In overnight trading, the yuan fell to a six-month low outright (CNY6.1310). The PBoC’s continued effort to push the currency lower is finally paying off – causing a short squeeze in the onshore market. The CNY has depreciated -1.5% from its record high versus the USD set last month and has fallen -1.2% year-to-date after appreciating +2.9% last year. Offshore investors can expect the PBoC to continue intervening and weakening the CNY further or at least until they have convinced the “offshore” investors to change their bullish views. Ongoing moves like this will require Chinese trading authorities to widen the trading range.

It’s rather difficult to get overly excited over any other asset class. Money remains cheap; stocks are performing as they should, albeit above valuations. But looking at the various other asset classes, the lack of volatility does not warrant investors to change their trading strategies wholeheartedly just yet. U.S. Treasurys seem to have been stranded for months. Their yields spiked nearly a year ago, last May, when ‘tapering’ was first suggested. Ever since, U.S. 10′s have been wrapped between +2.5% and that psychological +3% level, and through the ongoing emerging market fallout. This ideal scenario is not sustainable especially now that the U.S. economy seems to be on the road to recovery, with or without inclement weather. Before long, Janet Yellen, Chair of the Federal Reserve, will be touting other policy guidance issues, well removed from the “tapering debate”, and that should get U.S. longer-term yields finally moving higher again.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Source: Forbes Business

 
 

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